Macro Ch. 17
monetary policy has __________ impact on LR Phillips curve
no
NAIRU
non accelerating inflation rate of unemployment = natural rate of unemployment = has no tendency to increase or decrease
if expected inflation falls, the long run Phillips curve will
not be affected
if actual inflation is lower than expected, wages will be
higher than expected, firms hire fewer workers than expected, and unemployment rates rises
Short run tradeoff between unemployment and inflation
higher unemployment is usually accompanied by lower inflation, and vice versa
an increase in expected inflation rate will shift short run Phillips curve
to the right
All other factors held constant, increased growth in aggregate demand will
A) increase inflation. B) reduce unemployment. C) move the economy to a higher point on the short-run Phillips curve.
where does short run Phillips curve intersect long run Phillips curve?
at the point where actual inflation is equal to expected inflation
short run Phillips curve will not shift unless there is a
change in inflation expectations
when unemployment is above its natural rate, the inflation rate will eventually
decrease
weak increase in AD causes
low inflation, high unemployment
increased AD will
increase inflation, reduce unemployment, move economy to a higher point on the SR Phillips curve
in LR, Fed can affect __________ but not ___________
inflation rate; unemployment rate
expected rates are found along
long run Phillips curve
if actual inflation is higher than expected, wages will be
lower than expected, firms hire more workers than planned, and unemployment rates fall
unemployment always returns to _______ _________, regardless of inflation rate.
natural rate
if the long run aggregate supply curve is vertical
the trade-off between unemployment and inflation cannot be permanent
a decrease in AD will move economy
to a lower point on the SR Phillips curve
key to understanding the short run trade off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is _________________ by both workers and firms
unexpected
If Fed uses contractionary monetary policy to fight inflation,
AD curve would shift left and economy's equilibrium would move down SR Phillips curve. RGDP would fall and inflation would be reduced (at cost of high unemployment)
If Fed uses expansionary monetary policy to fight high unemployment,
AD curve would shift right and economy's equilibrium would move up the SR Phillips curve. RGDP would increase and unemployment rate would fall (at cost of high inflation!)
Phillips Curve
a curve showing the short run relationship between unemployment rate and inflation rate
strong increase in AD causes
high inflation, low unemployment